Last month I was fortunate to be in Warsaw (Poland) attending an international conference titled “Society, economy and finance in the face of market and demographic volatility” focused extensively on retirement planning in the face of the ongoing demographic shift. I participated in a discussion titled “The use of behavioral economics in shaping retirement awareness” which together with other panels gave me quite a lot of new food for thought, which I am excited to share with you below.
The use of behavioral economics in shaping retirement awareness panel participants from left to right: Roberto Carcache (Vitalis, Portugal), Robert Zapotoczny (PFR Portal PPK, Poland), Žiga Vižintin (Pokojninska družba A, Slovenia), José Vila (University of Valencia, Spain), Jesús María García Martínez (University of Barcelona, Spain)
PPK plans in Poland and auto-enrollment
At the start of the conference Bartosz Marczuk, vice-president of PFR (The Polish Development Fund) and Robert Zapotoczny, president of the PFR Portal PPK, presented the latest data on how automatic enrollment in PPK pension plans is going. PPK or employee capital plans were launched in Poland in 2019 and are a special long-term savings scheme in which the employee’s private savings are topped up by the employer and also the state. Employees under the age of 55 join the plans automatically. If they don’t opt-out, the employer will enroll them after 90 days of employment. In the basic PPK plan the employee contributes each month 2% of his gross salary topped up by 1,5% from his employer and the government contributes each year to every member an additional 240 PLZ (€53) and in the first year an additional 250 PLZ (€55) on top. This means the employee gets quite a generous tax incentive from the government and also a company match from his or her employer. More details about the PPK plans and how they work here.
The main objective of the plans is to provide an additional income in retirement, but the funds can also be withdrawn at any time earlier and paid out as a lump sum. This special and surprising feature was deliberately added to the plans to make people understand the assets in the plans are their private property and that they are the only ones who can decide about them. For a bit of historical context – in 2013 by then mandatory supplemental pension plans in Poland were in the aftermath of the global financial crisis kind of “nationalised” and part of the balance of members was transferred from the second to the first public pension pillar. To put it short, that killed all of the trust people had in the system. This is why the designers of the new PPK plans knew they needed to put special attention on this sensitive issue and do everything possible in the new plans, to slowly win back the trust. As Mr. Zapotoczny told me, they knew they needed to do everything right this time around, as they will not get the third chance and this is why they decided to allow withdrawal of assets from PPK plans at all times.
Bartosz Marczuk, vice-president of PFR presenting the development of the pension system in Poland (source: PFR Portal PPK).
So from 2019 thanks to auto-enrollment the new PPK plans gained 2,6 million new savers, which is a substantial number. Due to the bad aftertaste of the 2013 events, opt-out rates were at the start quite high and stood above 60%, but the intensive campaign in the last years to raise awareness and the fact people at the end of the first years saw their account balance rise quite quickly due to employer match and additional payments from the government, the opt-out rates are starting to improve and more and more members stay in the plans. Another positive news was just published this month, because all members who opt out are later re-enrolled and at the march re-enrollment the PPK plans gained 820.000 new members, which is an increase of more than 30% compared to February this year. This brings the new combined number of members with PPK accounts in march to 3.76 million and also raises the participation rate from 35.33% to 43.70%. You can find more details on the latest developments in the PPK plans here [1].
Trust is key for auto-enrollment to work
One crucial element of auto-enrollment is trust in the system and by system I mean the retirement system of a particular country and also wider trust in the whole political system. This was nicely highlighted in the report from the European Commission titled “Best practices and performance of auto-enrolment mechanisms for pension savings” which you can find here [2]. In countries with a lack of trust many people will use the option to opt out from such a scheme and as we see in the case of Poland, trust is something that can take years or decades to build and I’m really glad to see the latest figures show a positive trend.
This is an important lesson for everyone thinking auto-enrollment is a magical wand that can over the night solve the retirement saving crisis many countries are facing. Auto-enrollment is an incredibly powerful policy that can help people on their way to a financially secure retirement, but in order to work it needs a certain level of political maturity in a country (also a labour market with a high share of formal employment helps) and most of all trust of the people in its institutions. The implementation of it must be accompanied by a long term awareness campaign that has to start way before the first people are auto-enrolled in the plans and has to continue years into the future making sure the right messages accompany such an important policy affecting the entire workforce. At the conference Seda Peksevim, founder and managing director of Pensión Research & Consulting, shared similar concerns that auto-enrollment is not a magical solution especially for emerging market countries and she also presented the case of Turkey, where auto-enrollment did not reach its goals. More about this topic in her guest comment for the European Pensions portal [3].
The panel ” Retirement challenges of the modern world ” was attended by: prof. Gertruda Uścińska (President of ZUS, Poland), prof. Thomas Post (Maastricht University, Netherlands), Dr. Seda Peksevim (Pensión Research & Consulting, Turkey), Dan McLaughlin (Smart, UK), prof. Maria Mercè Claramunt Bielsa (University of Barcelona, Spain), prof. Inmaculada Dominguez Fabian (University of Extremadura, Spain) and Jakub Janas (Investment & Pensions Europe, UK).
Auto-enrollment on the rise in Europe
Given all of the above I’m very excited to see another European country of Slovakia introducing auto-enrollment this month and according to their provisions it will apply to all first-time workers under the age of 40, who will have the option to opt-out after two years [4]. Ireland also plans to start auto-enrolling employees in retirement plans from 2024 onwards. According to what’s currently known they plan to enrol all employees aged between 23 and 60, earning over €20,000 per annum (across all employment), which are not already contributing to an occupational pension plan. They will be free to opt-out at the end of the minimum membership period during the 7th and 8th month and on each occasion during the first ten-year period in which contribution rates will increase. Those who opt-out will also be automatically re-enrolled after two years. You can find more details about their plans in my article from last year.
Another clear message of the conference in Warsaw was – we all face similar demographic challenges, from Spain to Slovenia and Poland, and no two pension systems are alike. The key underlying condition for them to work is always the same and that is trust of the people. Without it no reform works and policy makers have to keep this in mind and design long term policies and at the same time instil trust in people by acting with integrity, showing consistency, and being credible. Is this too tall of an order for most of today’s politicians? I hope not.
The recording of the entire conference with all the panel discussions is available online at the link and the press release here.
Further reading and references:
[1] 3.3 million people in Employee Capital Plans (2023). PPK monthly bulletin, PFR Portal PPK. Retrieved from: https://www.mojeppk.pl/aktualnosci/biuletyn_ppk_kwiecien_maj_2023.html
[2] Best practises and performance of auto-enrolment mechanisms for pension savings (2021). European Commission, Directorate-General for Financial Stability, Financial Services and Capital Markets Union, Devnani, S., Pate, L., Muller, P. et al.. Retrieved from: https://op.europa.eu/en/publication-detail/-/publication/6f40c27b-5193-11ec-91ac-01aa75ed71a1/language-en
[3] Guest Comment: Auto-enrolment: Not a lifeboat for EM countries (2021). Seda Peksevim, European Pensions portal. Retrieved from: https://www.europeanpensions.net/ep/GC-Auto-enrolment-Not-a-lifeboat-for-EM-countries.php
[4] Slovakia reforms its pension system (2023). Lockton Global Compliance. Retrieved from: https://globalnews.lockton.com/slovakia-reforms-its-pension-system/
Irrational Retirement 